CURRENT MONTH (February 2018)

Commercial Finance

The Southern District of New York on the Enforceability of a Clause Limiting Consequential Damages in a Revolving Credit Facility Agreement

By Stephen Sepinuck, Gonzaga University

In re Lyondell Chemical Co., No. 17-4375-DLC, 2018 WL 565272 (S.D.N.Y. Jan. 24, 2018). Although a lender breached a $750 million revolving credit facility by failing to lend, the lender was insulated from liability by a term in the credit facility disclaiming consequential damages. Such clauses are enforceable under New York law except to the extent that they cover claims for gross negligence or intentional wrongdoing or are unconscionable, and there was no claim that any of those exceptions applies. However, the clause did not bar restitutionary damages, and thus the lender had to return the $12 million commitment fee paid by the borrower. While the lender would be entitled to deduct from that amount the value of its partial performance arising from an earlier loan it made under the credit facility, the lender failed to prove the value of that performance.

The Eleventh Circuit on Buyer’s Obligation to Pay Note Regardless of Existence of  Possible Defenses   

By Stephen Sepinuck, Gonzaga University

DZ Bank AG Deutsche Zentral-Genossenschaftsbank v. McCranie, No. 16-14773, 2018 WL 345045 (11th Cir. Jan. 10, 2018). An individual who bought an insurance agency franchise with funding from an entity related to the seller, and who gave the lender a security interest in the agency’s assets, had no defense to payment on the note, now owned by an assignee, based on the fact that the seller allegedly breached the franchise agreement. Even though the note referenced several other contract documents and was therefore not a negotiable instrument, it nevertheless represented a separate obligation, so that claims or defenses arising from the purchase were not a defense to payment on the note.

Bankruptcy Law

Department of Education Releases RFI on Undue Hardship Threshold

By Buckley Sandler LLP

On Feb. 21, the Department of Education published a Request for Information (RFI) seeking feedback on whether it should clarify the threshold for “undue hardship” for borrowers seeking to discharge loans through bankruptcy. According to the RFI, current U.S. Bankruptcy Code states that student loans can be discharged in bankruptcy only if failure to do so would “impose an ‘undue hardship’ on the borrower and the borrower’s dependents.” However, Congress has never defined “undue hardship” for the purposes of the code, nor has the department been delegated the authority to do so. Instead, the department has used two tests summarized in its 2015 Dear Colleague Letter to provide guidance on assessing undue hardship. The RFI requests comments on the current “undue hardship” evaluation process and whether changes should be made to the 2015 letter. Comments on the RFI are due May 22.

International Law

Puerto Rico Ruling Leaves Bond Insurers in the Dark

By Michael Enright, Robinson and Cole

U.S. District Judge Laura Taylor Swain, who is presiding over Puerto Rico’s debt adjustment proceeding under PROMESA, recently ruled that bond insurers (standing in the shoes of the bondholders) were not entitled to a declaration that special revenues held in reserve accounts pledged to secure the bonds were property of the bondholders and must be turned over for debt service on the bonds. Instead, Judge Swain held that Section 928(a) of the Bankruptcy Code does not address payment or lien enforcement at all, and merely provides that pre-petition liens of this nature remain in place post-petition. The provisions of Section 922 were of no further assistance to the plaintiffs, because those provisions simply permit the application of pledged revenues if they were voluntarily paid over by the debtor, and did not create an affirmative obligation to make payments from those revenues. Assured Guaranty Corp., et al. v. Commonwealth of Puerto Rico, et al., No. 17 BK 3283 (D. P.R., January 30, 2018). Judge Swain ruled that this “narrow, straightforward reading” provides internal consistency among the Bankruptcy Code sections at issue and gives adequate affect to each. She turned away challenges based on inconsistent precedent from the Jefferson County Ch. 9 case. The ruling in the Puerto Rico proceedings is certain to raise concerns among other holders of municipal debt that is secured by pledged special revenues, whether in Puerto Rico or stateside. 

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ARTICLES & VIDEOS (February 2018)

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